Most student loan debt is federally guaranteed, meaning that if the borrower does not repay the loan the federal government repays the lender. The federal government has thus made it a requirement that student loan lenders oppose discharge of student loans in bankruptcy proceedings.
Federal law makes it very difficult to obtain a discharge of any portion of a federally guaranteed student loan. Federal law also eliminates the statute of limitations, the time limit for bringing a legal action to collect a debt, for any collection action taken under a federal loan program, whether by a school, guaranty agency, or the United States.
As a result, many people feel trapped by their student loan debts, unable to afford payments but afraid that they can't get any relief from their debts through bankruptcy. What are their options?
The principal requirement for obtaining a discharge of a federally guaranteed student loan is to prove to the court that repayment will cause undue hardship.
The same test applies in both Chapter 7 bankruptcy cases, through which a debtor seeks to fully or partially discharge debts, and Chapter 13 bankruptcy cases, through which debt is restructured over a repayment program, normally with a partial discharge of debt at the conclusion of the repayment plan.
The most common test applied in bankruptcy court to evaluate a petition for discharge of student loans is known as the Brunner test.1 Under the Brunner test, a student loan debtor may be possible to get a full or partial discharge of a student loan if the debtor is able to prove:
- Based on the debtor's current income and expenses, the debtor cannot maintain a minimal standard of living if required to repay the loan;
- Additional evidence exists that indicates that the debtor's inability is likely to persist for a significant portion of the repayment period for the student loan; and
- The debtor has made a good faith effort to repay the student loans.
If a debtor has dependents, the court will consider whether the debtor can maintain a minimal standard of living for himself or herself and his or her dependents. Courts generally do not require that a debtor meet the federal standard for poverty in order to demonstrate the inability to maintain a minimal standard of living.
Factors that might influence a court to find undue hardship include:
- A clear effort to find employment, but with the inability to find work at a wage sufficient to reasonably support the borrower and the borrower's dependents;
- Long-term disability, especially following an award of SSI or SSDI disability benefits;
- The loan is owed to a school that closed before the student could graduate, or was shut down due to fraudulent activity;
The Brunner test is followed in most federal courts, although some courts question whether it creates an appropriate standard for discharge.
It is very difficult to satisfy the elements of the Brunner test. Many debtors who prove its elements may find that the court only allows partial discharge of their student loans in their bankruptcy case. However, any amount of the loan that the court finds to be dischargeable under Brunner will be discharged at the conclusion of the bankruptcy case, and will not have to be repaid.
If you do not qualify for a full or partial discharge of your loans in bankruptcy, you still have options that you can explore:
- Refinancing Your Student Loans: Although you have to be careful about how much more it may cost to pay off your loans, you may be able to refinance or consolidate your student loans to lower your ongoing payments.
- Forbearance Agreements: A student loan lender may agree to allow you to take a break from repayment. Although you will continue to accrue interest that must eventually be repaid, forbearance may allow you to get into a better position to later repay your loans.
- Chapter 13 Bankruptcy: Even if you are required to fully repay your student loan, a Chapter 13 repayment plan could restructure your payments over the term of the repayment plan, which is typically five years long. Even though you still repay the loan, restructuring the payments and discharging other debts may put you in a much better position to do so at the end of your repayment plan.
- Forgiveness Programs: If you become disabled, you should explore any options that your student loan lender offers to forgive loans based upon long-term disability.
- Public Service Programs: Some educational institutions, lenders, and other organizations offer programs that may pay for or excuse part or all of a borrower's student loans in exchange for their employment in a qualifying public service position, possibly including law enforcement and military service. For example, the Department of Education offers a Public Service Loan Forgiveness (PSLF) Program for direct student loans.
- Income-Based Repayment Plans: Borrowers who qualify for income-based repayment plans may be able to minimize the hardship of even very large student loan debts.
Whatever approach you choose, it is best not to delay in taking action, as you will continue to accrue interest and any later or missed payments will harm your credit.
1. The test is named after the case in which it was first articulated, Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).